Driving 401(k) savings and retiring independently

Most 401(k) conversations seem to focus on investments and not on 401(k) savings. Unfortunately, savings is by far the most influential factor for long-term retirement success. Maybe it’s because thoughts of growing your money are more exciting than not spending your money so that you can save more.

How much 401(k) savings do you need?

Do you know how much you need to save, for how long and at what rate of return to create the nest egg you need to retire on? I have yet to meet anyone who has done the calculation correctly. Most have not even tried to do so.

401(k) savings and savings matching

If you are like many 401(k) savings plan participants, you have heard that you should invest at least to get the match. After all it is free money. Let’s say that you get a dollar for dollar match up to 3%. You save 3% and get 3%. If the money is not immediately yours (called a safer harbor) then the money may not ever become all yours. Moreover, let’s say you do get the money but you need to save 10%. That means a 4% gap that is increasingly getting worse.

More 401(k) savings or more return?

If you are like most people I talk with, you isolate your 401(k) savings from what you invest in. Growing your money to your future desired balance requires a balancing act between 401(k) savings and investing. The more return you get the less you need to save.

For example, assume you make $100,000 and want to live on $72,000 at the end of 25 years. Assume you get a 3% match on salary and save the current maximum of $17,500. Further, assume a 25% tax on your retirement withdrawals. If you get a 9% annual return, you would have a balance of $2,431,153 and be 86% funded. There are many ways to approach what to do with a nest egg (see our Retirement Income tags) so you may find this sufficient.

You may want to avoid the volatility of the market that is likely necessary to target a 9% annual return. You may choose a more conservative return target, say 2% to avoid market volatility. That return would provide a balance of $947,395 and have you only 16% funded to your goal. This should show how savings and rates of return are interrelated in creating a future nest egg.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

How to get your 401(k) savings on track

Do you hate the idea of forgoing the pleasure of spending today for the pleasure of spending in the future? That often is one of the issues involved in the 401(k) savings conversation. You may be fortunate enough to be able to “save tomorrow”. That could mean using savings acquired from paying off debt or from future pay raises. I find that most people benefit from an accountability partner, coach and cheerleader. I offer a financial review to help you determine where you are at today. We can then discuss what tradeoffs you are willing to make. My associates and I will also educate you on potential investment strategies that could help relieve some of your nervousness surrounding the uncertainty of market returns. We can also assess your financial foundation- debt, rainy day savings and life, disability, health and property and casualty insurance. I recently benefited by having uninsured motorist insurance.

The best day to start a new diet is today. Are you ready to assess where you are and what changes you need to implement?

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

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